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Saturday, June 14, 2008

McCain himself has said "The issue of economics is not something I've understood as well as I should," and made similar assertions on many occasions. This makes it particularly important who he's listening to for economic policy advice. Here are his economic advisers who have been mentioned in the press:

Phil Gramm sourceGramm is a lobbyist who was vice president of one of the investment houses most heavily implicated in the mortage industry scandal. He has described the United States as a "nation of whiners" and said that we are in a "mental recession." As a senator he pushed for the banking deregulation that led to the current crisis. Here is an excerpt from a very good article describing his role:

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown.....The [Commodity Futures Modernization Act], he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."....Because of the swap-related provisions of Gramm's bill ... a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets. "These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. ....Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief SEC accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."

Kevin HassettsourceHassett has been widely ridiculed for writing the book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market in 1999, predicting that the Dow would hit 36,000 within five years, if not sooner.

Carly FiorinasourceFiorina was spectacularly fired from her previous job as CEO of HP. Regarding Fiorina, Jeffrey Sonnenfeld, the senior associate dean for executive programs at the Yale School of Management, says "What a blind spot this is in the McCain campaign to have elevated her stature and centrality in this way. You couldn’t pick a worse, non-imprisoned C.E.O. to be your standard-bearer.” According to the Times,

... Republicans say Ms. Fiorina is using the McCain campaign to rebuild her image after her explosive tenure at Hewlett-Packard. They also say it is hard to see why a woman widely criticized for mismanaging one of Silicon Valley’s legendary companies is advising and representing a candidate who acknowledged last year that he did not understand the economy as well as he should.

Nancy PfotenhauersourcePfotenhauer is a pure distilled product of Koch Industries, an oil company which funds much of the right wing message machine. See here for details.

Donald Luskin sourceLuskin has been repeatedly criticized by many observers for his shoddy analysis. He is not an economist and according to his own online bio is a college dropout. He recently wrote in a Washington Post column that "we're on the brink not of recession, but of accelerating prosperity." Here is a discussion of that column with links to some of his previous mispredictions. I can attest based on my own interaction with him a few years back that in addition to being not the sharpest tack in the box, he is also an extremely unpleasant person.

Doug Holtz-EakinsourceHoltz-Eakin is a formerly respected academic and government economist who has been reduced to making distortionary arguments to paper over the massive deficit black hole McCain's tax cuts would create.

Arthur LaffersourceLaffer is the originator of the Laffer curve, the fringe view that claims government revenue increases when tax rates are lowered. There is zero empirical evidence this is true at current tax rates. McCain has repeatedly said that he believes this foolishness, but Holtz-Eakin has said (also repeatedly) that McCain does not.

23 comments:

Given the inherent shape of the Laffer Curve, how can the originator, Arthur Laffer, suggest that ALL tax cuts increase tax revenues. Easy…he doesn’t. And if it’s such a fringe concept, why has the rest of the world been cutting taxes over the last half a century, especially the Baltic countries implementing low, flat rate taxes?

Also, do you advocate raising the corporate income tax rate as Obama does? If so, what benefits would that provide our country given that rates are already so high relative to the rest of the world?

im:I'll have to write a full post about the Laffer Curve. The question is whether tax cuts in the U.S. from current tax rates increase tax revenues (as I said in the post). The links in the post make it clear that Laffer, and McCain at least on some days, answers yes to this question. This is a "fringe" view in that a miniscule number of economists hold this view--I would venture to say zero in top 20 economics departments. Holtz-Eakin, apparently McCain's chief economic adviser, categorically rejects this view and (despite what McCain himself has said) insists that McCain does, too.

Regarding the Baltic countries, I take it from a quick Googling that Laffer has a paper claiming that after Russia and the Baltic countries reduced tax rates, there was growth, and he argues that this supports his claim. Clearly there is a huge problem of causality in looking at isolated cases and claiming that event A caused outcome B. There are lots of counter examples, e.g. high growth in the U.S. under very high tax rates during the 1950s, and high growth in the 1990s after tax increases under Clinton.

Regarding the corporate income tax rate, first it is important to point out that corporate tax revenue as a % of GDP is not high in the U.S. RATES are relatively high, but due to all sorts of loopholes, the amount of tax paid by corporations is not.

Overall, I would prefer that more corporate tax revenue be collected by eliminating these loopholes and simplifying the corporate tax system, rather than raising rates. (This prescription for broadening the tax base is what most economists would suggest.)

Broadly, though, given a particular level of government spending, the choice is between the TYPE of taxation. You have to tax something to raise the revenue to pay for everything the government does. Obama would shift the burden from labor to corporations--reducing taxes on wages for the vast majority of Americans. While the exact incidence (who actually pays) for corporate taxes is disputed, it's fairly clear that the burden falls most heavily on the wealthy. In the time of the greatest inequality since at least the 1920s, I think it's appropriate for the government to ask those at the top to contribute more.

Thanks for the reply. No need to right a post of the Laffer Curve as I've known Arthur for nearly 20 years and have heard it first hand.

In re corporate taxes, I believe that the incidence of such taxes is far more reaching than you give credit. In general, the corporate tax is exceptionally hard on economic growth because they lead to diminished returns on capital, higher prices and/or lower wages. I have no problem with broadening the base, but to increase the rate is poor policy prescription. I’m confused by the fact that Obama wants to keep jobs in the U.S. while at the same time increasing the cost of doing business here.

On the Laffer issue, I believe that he would admit that with where current rates are today, a marginal cut in personal income tax rates probably would not lead to an increase in revenues. I think his primary argument would be to not RAISE rates on any group because of the distortion taxes have on incentives. Taking money out of the right pocket to put it in the left is not the answer. As Kennedy said, “a rising tide lifts all boats.” If you tax people who work and subsidize those who don’t, don’t be surprised if you have fewer people working.

By the way, Laffer voted for Clinton twice and would tell you that he thought Clinton was a great president, just a disgusting human being. Clinton was a huge free trader (signed NAFTA into Law and advocated for China’s membership into the WTO) and cut the capital gains tax from 28 to 20 percent. Laffer has also done numerous proposals and campaigned for the left leaning Jerry Brown. He’s a pretty fair guy and doesn’t resort to name calling with those who have differing opinions.

By the way, I have huge issues with McCain and am torn on what to do in the upcoming election. I'm actually frustrated that these two candidates are the best that we can come up with as a country.

im,Thanks for the back-and-forth. I promise to work up a future post on two of the issues you raise--1) the incidence of the corporate tax, and 2) the effects of increasing the corporate tax rate while reducing taxes on most workers (as Obama proposes to do).

A central truth of public finance is that eventually your level of taxation has to match your level of government spending. The appropriate question is thus the mix of taxation given a chosen level of government spending.

Laffer may be a nice guy, but he has been responsible for promulgating an idea that has been really damaging for economic policy--the untrue view that we can have our cake and eat it, too, by lowering taxes and raising spending.

If Laffer really doesn't believe that lowering tax rates would increase revenues at current rates, that would be big news. And if so, he's been greatly misrepresented in the NY Times article I linked to in the post. Excerpts from that article:*******Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.... Having once voted against the Bush cuts, Mr. McCain has reversed position and now has even enlisted Mr. Laffer as a special adviser. “McCain is on the right track,” Mr. Laffer said. While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical.

You run a great blog, so it's always fun to have a back-and-forth with a competent human being.

As I've noted in a comment on your "Is McCain a Lafferite?" post, raising revenues by cutting taxes would depend on the elasticity of supply of taxable funds. I believe Laffer would admit this as well. The problem with the NY Times article is that they use the word "taxes" in such a broad sense as it’s important to distinguish what tax one is speaking of. I think that even Laffer would agree that revenues don't ALWAYS rise with EVERY tax cut. As well, he has never been a promoter of increased government spending with concomitant tax cuts, so to say that he's always been for reduced taxes and increased spending is disingenuous.

So, do you then believe that the supply curve for taxable funds amongst the top 1% of income earners is the same shape as the bottom? If not, please explain further because I’m having a hard time following your logic in re the shape of the supply curve. I don’t see “tax hikes” as an exogenous variable for explaining “budget cuts” or vice versa. Rather, I see a change in tax rates and the percent change in the budget as exogenous variables (plus others) for elucidating the overall deficit. I’m not saying you’re wrong, I’m just saying I don’t understand.

Your second point I can rationalize given that tax rates are simply the price for government services. However, did your consumptive behavior for government services change when Bush cut the tax rates? Did you find yourself calling the fire department more, requesting your street to be cleaned more often, having your trash picked up more frequently, etc. just because, in theory, those services were cheaper? I would bet that you didn't change your behavior demonstrating a highly inelastic demand curve for government services.

IM, if you are saying that government is a conglomerate of markets, and I described the aggregate first order estimate, then we might both be right.

The level and type of services do change.

I do respond to higher garbage rates by demanding less garbage pick up when service rates rise. My change in demand requires that the stress be great enough to break a semi-monopoly stickiness associated with garbage pick-up. But, the slope is there.

Legislatures should be modeled as incomplete markets, but properly sloped.

As for the Bush tax cuts, a number of us voters did decide to use the lower price of government to purchase more of it, especially in Iraq. The war would not have happened under the prior tax rates.

If we look a equilibrium paths, we can say that government does tend toward a balanced budget, over time, and hence we expect the supply/demand/price to balance. But that requires the government production function to change, over time, via capital adjustments.

I’m not debating whether or not the supply curve for taxable funds is upward sloping; obviously it is. What I am trying to explain is that each household has a different slope. The wealthy have a relatively flat supply curve while those in the middle and bottom have a relatively steep supply curve. When you increase taxes you, in effect, lower the after-tax return on capital hence lowering the quantity of taxable funds supplied to the market place. The opposite is true for lowering taxes. You have to take that into consideration when evaluating changes in the tax rate.

What you also need to take into consideration are the two, diametrically opposing effects of a change in tax rates. The first effect is the arithmetic effect and is simply the change in tax revenues per dollar of tax base given a change in tax rates. If tax rates are lowered, tax revenues per dollar of tax base will be lowered by the amount of the decrease in the rate.

The second effect is the economic effect, which demonstrates that individuals respond to incentives. The higher the tax rates are, the less will be the incentive for people to engage in the taxed activity. Therefore, when tax rates are cut people will be more inclined to engage in the taxed activity triggering a pro-growth environment where workers are more inclined to work, employers to employ and producers to produce. Thus, a tax rate cut will result in a broader tax base which in and of itself would lead to more tax revenue.

Now the arithmetic and economic effects always work in opposite directions and, a priori, it is not quite clear whether total revenues will increase or decrease in conjunction with a tax cut. But in an environment with excessively high tax rates it is more likely that a reduction in tax rates will cause the economic effect to dominate the arithmetic effect, leading to an absolute rise in total revenues. The arithmetic effect is more likely to dominate when tax rates are low, hence leading to a fall in revenues accruing to the Treasury.

All in all, a dynamic framework has to be applied when evaluating the impact of a change in tax rates, up or down. Too many folks opt for a static model, which is only half correct.

"As for the Bush tax cuts, a number of us voters did decide to use the lower price of government to purchase more of it, especially in Iraq. The war would not have happened under the prior tax rates."

As I understand it, the Iraq/Afghanistan debacle is being financed not by present tax revenues, but by special appropriations, foreign lenders and--in general--defecit spending. It would seem that tax revenues (and by extension, tax rates) have little to no direct bearing on war spending, no? It just seems like a very strong claim to make. I'd be interested to see a clearer demonstration of how the decreased tax rate is a necessary condition for the war.

Great blog. One thing, though: it would be so much more powerful without the name-calling ("clowns" "stupid" etc). I would love to be able to pass posts on to people I know who are on the fence; language like that can be a real turn-off because it doesn't stick to facts. Otherwise, the content can be hurt by preaching-to-the-choiritis. Just my 2 yen. Thanks for all the work you've done to compile all this info.

anonymous,Thanks for the suggestion. I changed "clowns" to people at your suggestion.

We are, however, clearly a partisan blog, and I think people expect that from the name of the blog.

Luskin is a difficult case. He really is just tremendously incoherent and often doesn't show an understanding of basic economics. It's hard to overstate how astounding it is that he's counted among McCain's advisers. It's Brad Delong--not me--who refers to him as the "Stupidest Man Alive." Brad is a former Treasury official, a tenured professor, and one of the nation's top macroeconomists. I'm not sure how else to discredit him. It would be hard for a non-economist to understand without a very long explanation just how unintelligible he is.

I'd like to get some more solid numbers that match each other. Can you change the Obama "95% of working families" to an actual number like McCains? If not, can you change McCain's to be a quantity of the same thing as Obama's? Also, the phrase "working class family" is ambiguous and sounds subjective to me. Can this be clearly defined with numbers, or better yet, without qualifiers at all?

I'd like to compare the plans, but these numbers aren't really useful for doing that either way. Hopefully you can help me!

So here is the crux of your objection: A central truth of public finance is that eventually your level of taxation has to match your level of government spending. The appropriate question is thus the mix of taxation given a chosen level of government spending.

Laffer may be a nice guy, but he has been responsible for promulgating an idea that has been really damaging for economic policy--the untrue view that we can have our cake and eat it, too, by lowering taxes and raising spending.

The problem with the current administration and congress is that the great benefit of tax cuts and the resultant rising tax revenue was swamped by the increase of spending beyond the revenue increase.

So lets cut spending, not raise taxes so we can believe we can spend more.

The Laffer Curve is all of a sudden "fringe"? I'm an Econ student, the Laffer Curve has its own section in every entry level economics book I have ever seen and therefore I think it's actually somewhat fundamental.

It doesn't matter who you tax, taxes screw everyone. Tax the smart and rich and they pass the tax on to the dumb and poor in the form of higher prices on goods and services. Tax the dumb and poor and they don't buy as much from the smart and rich.

If you tax the smart and rich they have less incentive to do business and thus innovate. If you tax the dumb and poor they just bitch more to the government. I'd rather stifle the government than innovation. So if you can only give one group a tax break... yes, breaks for businesses and the wealthy is the way to go. At least you're giving a break to people who are being productive.

The Laffer Curve is not fundamental and it is not "all of a sudden" a fringe view. It has always been fringe. It definitely does not have its own section in every entry level economics books.

I believe Greg Mankiw's book is the most commonly used intro textbook these days. It gives a brief mention of "The Laffer Curve and Supply Side Economics" as a case study, which you can find here:http://gregmankiw.blogspot.com/2006/12/supply-side-economics.html

As a college economics instructor with nearly 15 years experience, I can second Don Pedro's remarks about the Laffer Curve. I reviewed several intro texts that I have in my office this morning. The Baumol/Blinder and Hall/Lieberman texts have no mention of it at all. The Parkin/Bade and McConnell/Brue texts cover it in much the same way as Mankiw's--they mention the theory and then note that it failed utterly as a guide for policy in the 1980's.